PROMOTING EXPORTS FULL OF RISK FOR WORLD ECONOMY / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

Promoting exports full of risk for world economy

By Alan Beattie

Published: August 10 2010 21:31

Trade imbalances are re-emerging in the world economy. State economic intervention is enjoying a retro-1970s revival. The financial services industry is in global disgrace.

Time, it would unfortunately appear, for a fresh outbreak of mercantilism. A fixation with goods exports as the driver of economic growth, usually mainly confined to newly industrialising emerging market countries, is spreading across the US and Europe. If governments are not careful, this will end up with manufacturing export lobbies once again seizing control of government policy. That would be highly unwise.

Countries such as Germany and Japan have long had an export mania. Naoto Kan, the new prime minister of Japan, speaks lovingly of aggressive government support for Japanese companies seeking overseas sales.

But the syndrome has also become acute in countries, such as the US and the UK, that ran large current account deficits during the boom of the 2000s and seem likely to do so again if demand continues to revive and the world economy to recover.

The administration of US President Barack Obama, evidently tiring of its experiment of barely having a trade policy at all, recently adopted the apparently arbitrary goal of doubling exports in five years. So far this has been fairly harmless, since it amounts to little more than bureaucratic reshuffling and a bit more lending from the Export-Import Bank. But some congressional Democrats are pushing for more explicit support for exports. Meanwhile, David Cameron, the UK prime minister, evidently hankering for the days of the East India Company, seems to want to refashion the British diplomatic corps into a commercial salesforce.

No one should doubt the need to rebalance the global economy, a task made more acute by China’s re-emerging trade surplus, and there are things governments can usefully do to encourage it. Exchange rate adjustment is one, and the US – with rather intermittent support from the European Union and some emerging markets – is right to keep up judicious pressure on Beijing over the renminbi.

But an explicit policy of favouring exporters is liable to recreate old problems. It risks an inefficient, subsidised and sometimes ethically suspect export-industrial complex distorting the national economy. Encouraging the idea that exports create jobs while imports destroy them might turn protectionism, a minor irritant in recent years, into a serious problem. By definition, every country cannot simultaneously export its way out of recession.

In the UK, the most persistent mendicants for public funds are the arms exporters, which have recently stepped up their campaign for defence contracts and other government support. BAE Systems, the flagship of the arms industry flotilla, currently has an unmissably large display advertisement flaunting the Union flag in London Underground’s Westminster station, presumably designed to beguile gullible passing MPs worried about British jobs. But we know where weaponry export promotion leads: to the grubby deals that sold material to Iraq in the 1980s, to the Malaysian Pergau dam scandal in 1991, where development and the environment were sacrificed for arms contracts, to the wasteful BAE Systems deal in 2001, which pushed a costly and pointless air traffic control system on Tanzania. Such support generally rests on the economic illiteracy of the “lump of labour fallacy”, which improbably assumes that the skilled workers employed under such contracts have absolutely no other options except unemployment. You can have as many arms export jobs as you are prepared to waste public money subsidising.

The net contribution of manufacturing exports is in any case less than it appears since, even in advanced economies, they import many of their inputs. Mr Obama may yet get his doubling of exports, but he had better be prepared for imports to rise sharply as well.

A recent paper by three economists from the International Trade Commission, a federal agency, calculates that 39 per cent of the jobs supported by goods exports are actually in service companies. The authors’ conclusion seems to be that government export promotion will thus help create service-sector jobs. It might be more apposite to conclude that promoting efficiency in the domestic service sector is one of the best ways of boosting exports.

Indeed, it is service-sector exports themselves that show most promise, including often-forgotten contributions to the balance of payments such as fees for the use of intellectual property. The US Chamber of Commerce recently put out a rather plaintive note trying to correct the common misapprehension that China is the world’s biggest exporter. China may send abroad $1,200bn (€905bn, £752bn) in goods each year – much of which involves assembled goods whose components were made elsewhere – to the US’s $1,100bn, but the US’s half-trillion dollars of service exports on top puts it into first place overall.

So, if not explicit export promotion, what instead? At this point, the standard Washington talking points would suggest that I argue for the tremendous importance of pushing through Congress the bilateral trade deals with South Korea, Colombia and Panama negotiated by the Bush administration. Those deals, having run into the congressional hostility to trade pacts, have been hanging around like embarrassing relatives ever since.
The White House, casting about for something of substance to say when Mr Obama visits Seoul for the Group of 20 summit in November, recently dragged the Korea deal out of the shadows and promised to get a workable version ready by then. But it is simply dishonest to pretend that pending trade deals are pivotal in achieving the export target. South Korea, although a bigger trading partner than most of the pitifully small economies with which the US has signed bilateral pacts, still buys only 3 per cent of US goods exports.

There is no obvious lever to pull that will reliably improve export performance or obviate the need to do the basics: keep up diplomatic pressure on exchange rates; enforce existing trade agreements; stick to the boring old domestic knitting of running a sensible macroeconomic policy, improving education and infrastructure and seeking a supportive business environment.

Exporting is fine. Export promotion is fraught with danger. The need to change the pattern of growth in the world economy should not become an excuse for mercantilism fraudulently to present itself in a superficially more constructive form.

Copyright The Financial Times Limited 2010.